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MUMBAI: Indian real estate is now becoming way more attractive to investors — both foreign and domestic — than ever before, thanks to changes in regulatory framework. The global capital flow into Indian real estate in 2016 stood at about $5.7 billion. Though the historic high of 2007, in terms of total PE inflows, was not breached, last year proved to be the second best year so far.

This year has also started with a bang as real estate companies and projects attracted 19 investments totaling an announced value of $3.41 billion in the first quarter ended March. The value of investments in the March quarter was up 2.7 times from the year-ago period, which had seen investments worth $1.25 billion across 18 transactions, showed data from Venture Intelligence.

“Indian real estate has attracted around $32 billion in private equity so far since 2005…Despite Brexit and uncertainty around the new US president’s outsourcing and visa-related policies, private equity activity looks healthy in 2017 too, thanks to a strengthening and modernizing economy and the growing reputation of India as an attractive investment destination,” said Ramesh Nair, CEO and Country Head, JLL India.

The commercial segment, led by GIC’s $2.14 million investment in DLF’s rental arm, attracted an all-time high investment worth $2.6 billion across five transactions during the March quarter. Venture Intelligence data assumes the proposed transaction between DLF and GIC, which has been disclosed to the stock exchanges, goes through.

“While the mega deal between GIC and DLF’s promoters does skew the numbers in a big way during the first quarter of 2017, the spike in investor interest in the commercial segment is for real, given the enhanced activity of other investors like Blackstone and others as well,” said Arun Natarajan, founder of Venture Intelligence.

Global capital flows into Indian real estate are set to increase further. Rise in consolidation activity apart from transparency and possible listings of Real Estate Investment Trusts (REITs) in 2017 are some of the important developments expected to boost foreign and domestic investor participation.
While the commercial segment, with 76%, dominated the investments value pie, the residential projects continued to attract most number of investments attracting 12 investments in the first quarter. Residential projects attracted 63% of the volume pie worth $690 million, Venture Intelligence said.

The western region, dominated by Mumbai, attracted eight investments during the quarter, while projects in north India accounted for six deals, followed by south India with five deals.

The largest investment reported during the quarter was the GIC pact to acquire 40% stake in DLF’s rental arm DLF Cyber City Developers. The next largest deal was Blackstone Group’s $250 million investment to buy 15% stake in the office holding company of K Raheja Corp.

During the quarter, private equity real estate (PERE) investors obtained exits from five real estate investments fetching $119 million. The exit volume was down 62% compared to the same period last year that had witnessed 13 exit transactions worth $390 million.

India’s tier-I cities have moved up to the 36th rank in JLL’s 2016 Global Real Estate Transparency Index — a bi-annual index — on the back of improvements in structural reforms and a more liberal foreign direct investment (FDI) regime. Increase in transparency results in higher investment in such real estate markets.

With the allowance of 100% FDI into real estate industry, foreign developers are making big investment announcements.

Given the current prime minister’s focus on improving India’s stature amongst the global investment community, there has been a big change in India’s image as a business and economic hub. After 100% foreign direct investment (FDI) was allowed into the real estate industry, it was only a matter of time before foreign developers made big investment announcements.

One of China’s most prominent developers, Dalian Wanda Group, signed a memorandum of understanding (MoU) earlier this year with the northern state of Haryana to develop `Wanda Industrial New City’. The investment of USD 10 billion, phased out over the next decade, is a very significant outlay by any Chinese company in India.

Other Chinese developers are also interested in India and most likely to follow suit. A MoU signed between China Fortune Land Development Company Private Limited (CFLD) and Haryana state will see large format industrial parks come up in the state. Gezhouba, another prominent Chinese construction company, has in-principle agreed to invest INR 10,000 crore in irrigation projects in Telangana state.

It will be interesting to see if larger deals are signed in 2016.With China experiencing a slowdown in their own economy, the developers there will get an opportunity to benefit from India’s growth story. The Wanda investment will be one of its biggest, so far. It is also bigger than most deals that other Chinese companies investing abroad carried out in 2015.

Even for the Indian real estate industry, it will be among the biggest investments in the residential and retail asset classes by a foreign developer. Increased participation by foreign players is expected to help in the development of quality projects, which will benefit end users and simultaneously create opportunities for Indian investors too.

It will be interesting to ob serve the implications of Wanda’s strategy and the innovations such foreign players bring to India as they compete with local and well-established players to capitalize on the opportunities that India gives them now.

Foreign developers are also going to look at partnering with their Indian counterparts. Interestingly, large residential projects are of particular interest to other Chinese developers. It remains to be seen if commercial asset class also gets on their radar in the near future.

The Wanda deal:Wanda plans to invest USD 10 billion in the next 10 years to construct industrial townships, retail and residential developments. According to media reports, construction of the phase-I of `Wanda Industrial New City’ is likely to begin in 2016 and it will be spread over 1,300 hectares. It will comprise an industrial park that will house companies from various sectors, such as software, automotive manufacturing, machinery, health care, education and other industries. The first phase is anticipated to be completed in the next 3-5 years.

The Japanese could be next:Japanese and Chinese private equity investors are also looking at entering India’s real estate sector. Japanese developers are keen to explore strategic partnerships and enter into joint ventures with Indian builders, and are particularly interested in industrial projects. There is likely to be an inflow of at least USD 2 billion in investments from Japan into the Indian real estate market over the next three years.

Japanese developers and private equity investors are looking to enter Indian property market and could invest at least USD 2 billion over the next three years in residential as well as industrial projects, says JLL.

Realty consultant JLL India said in a report that the country is emerging as major investment destination for Chinese and Japanese developers.

China’s biggest developer Wanda has signed an MoU with Haryana government earlier this year and more developers from China and Japan are expected to enter the Indian realty market, it said.

Private equity investors from these two countries are also looking at entering India’s real estate sector, it added.

“Japanese developers are keen to explore strategic partnerships and enter into joint ventures with Indian builders, and are particularly interested in industrial projects. There is likely to be an inflow of at least USD 2 billion in investments from Japan into the Indian real estate market over the next three years,” JLL India Chairman and Country Head Anuj Puri said.

After 100 per cent foreign direct investment (FDI) was allowed into the real estate industry, it was only a matter of time before foreign developers made big investment announcements, he said.

“One of China’s most prominent developers, Dalian Wanda Group, signed a memorandum of understanding (MoU) earlier this year with the northern state of Haryana to develop ‘Wanda Industrial New City’. The investment of USD 10 billion, phased out over the next decade, is a very significant outlay by any Chinese company in India,” Puri said.

Other Chinese developers are also interested in India and most likely to follow suit, he added.

The RICS-JLL survey this January had shown that 62 per cent of the respondents felt that institutions from Japan and China could come knocking to the Indian real estate market in 2016.

The Indian real estate market is heading for a steady revival in 2016, with over 70% of investors expecting improvement in sales in the next 12 months, said a research report by property consultant JLL India and Royal Institute of Chartered Surveyors (Rics), an accreditation body.

The report Peering Into 2016: Taking Pulse of Investor Preference says there is a spike in investor interest in the real estate market as around 43% of respondents saying that the number of successful exits will increase this year.

While Mumbai and Bengaluru will continue to be the most preferred destinations for investment, commercial office and mid-segment residential property will be the top two preferred asset classes by investors, the report said.

“After relatively muted calendar years 2013 and 2014, private equity (PE) investors significantly increased their bets on the Indian real estate sector in 2015. This report examines the motivations and expectations of PE funds who are now actively ramping up their exposure to this sector,” said Ramesh Nair, chief operating officer, JLL India.

As per the report, a majority of exits over the last 12-18 months has been characterized by refinancing or buyback. A significant number of investors who participated in the survey believe that the refinancing theme is set to continue beyond the next 12 months, it added.

The report said proposed regulatory initiatives such as the relaxation of foreign direct investment rules in real estate and passage of real estate regulatory bill will enhance investment in smaller projects and positively impact sentiment by boosting buyer confidence.

“Today there are several financing options available. Driven by the need to increase returns and a desire to diversify, investors’ interest in international property markets is once again on the rise and India definitely seems to be leading that interest,” said Devina Ghildial, managing director (South Asia) Rics.

According to the report, newer sources of capital from Japan and China are expected to enter the Indian real estate market in 2016 while pure equity investments are likely to make a comeback this year.

For the report, JLL carried out a survey of seasoned investment professionals across a number of issues like market fundamentals, successful exits, distressed deals as well as top three asset classes and top three cities for investment over the next 12-month period.

“Few of the challenges in the market have bottomed out. So definitely the market is reviving but it is going to be a slow one. There is a going to be greater balance between demand and supply. Investor sentiments have improved,” said Venkatesh Gopalkrishnan, President (business development) and chief investment officer, Shapoorji Pallonji Real Estate.

“However, it is a cautious one where investors are now more focused on good quality and locations.”

It may take much longer for real estate investment trusts (REIT) to launch in India, with top realty firms and private equity (PE) funds finding the current tax structure unviable, despite the sops and incentives introduced in the recent Union budget. Experts say there is a slim chance the FINANCE ministry may introduce an interim tax relief for REITs, but most believe the wait for an efficient tax structure will probably last till next budget.

While the FINANCE minister proposed to rationalize the capital gains regime for sponsors exiting at the time of listing of units of REITs, subject to payment of securities transaction tax, matters such as minimum alternate tax (MAT) and dividend distribution tax (DDT) have not been addressed. “While the overall sentiment of the budget was good, it doesn’t look encouraging as far as REITs are concerned because of the tax inefficiencies,” said Mike Holland, chief executive officer, Embassy Office Parks, the entity under which global private equity fund Blackstone Group Lp and partner Embassy Property Developments Pvt. Ltd have aggregated an office asset portfolio valued at an estimated $2 billion.

The partners were earlier looking at a possible end of 2015 listing of their REIT if the budget had the right kind of tax incentives. Holland said that there are around 34 REIT markets around the world that have a fairly standard tax pass-through structure. REITs are listed entities that primarily invest in leased office and retail ASSETS, allowing developers to raise funds by selling completed buildings to investors and listing them as a trust. REITs will also give foreign investors a chance to invest in lease rental generating assets, an asset class otherwise prohibited for foreign investments. The 2014 budget took the first step in encouraging the trusts by providing a partial pass-through to them.

Senior executives of K Raheja Corp. Ltd and Phoenix Mills Ltd said that in the current form, REITs don’t seem very attractive. Atul Ruia, joint managing director, Phoenix Mills, which has a sizeable portfolio of shopping malls, said REITs don’t look like a completely workable option as of now.

However, this year, the firm is working on its first commercial mortgage-backed securities issue, a process by which it will raise debt against some of its assets. “We have not exempted any particular sector from MAT. There was huge demand even from special economic zones (SEZ) for exemption from MAT. In the case of dividend distribution tax also, which has been demanded for REITS, no particular sector has been exempted,” said a senior FINANCE ministry official, who did not want to be identified. “Once you start the process of exemption, it becomes endless. There are huge revenue implications involved. We get more than Rs.37,000 crore from MAT in a year,” the official said. “On REIT and infrastructure INVESTMENT trust, the pass through is clear; but at the special purpose vehicles (SPV) level, there is some problem. The issues posed to us were about the rental income and the sponsors’ capital gains. Both those issues have been addressed.

The industry has now raised some more concerns. We will look into it,” said a senior official from the income tax department, who did not want to be identified. Another firm working on a REIT listing is Bengaluru-based realty firm RMZ Corp., backed by sovereign wealth fund Qatar INVESTMENT Authority. “Since our scheduled listing is in the first quarter of 2016, we need more tax breaks in the next budget to come, in line with the internationally-listed REITs in other countries. We have no plans till then,” said RMZ’s managing director Raj Menda. DLF Ltd, which has a massive office portfolio, has been seriously looking at a REIT as a way to monetize its ASSETS. Rajeev Talwar, executive director at DLF, said the firm is focused on a REIT listing.

“Along with rate cuts by RBI this year, we are certain to move ahead. Bankers have been appointed for the purpose. In our talks, it has emerged that removing residual ambiguity around MAT will be a nailing factor for establishment of REITs and usher in INVESTMENT by FIIs (foreign institutional investors), and later by retail investors,” said Talwar. “As per provisions, MAT will be applicable on exchange of units against shares of SPV, despite the capital gains exemption given to sponsors of REITS. This despite the fact that though there is a book profit, there is no cash flow,” said Zulfiqar Shivji, global liaison partner and head of transaction advisory services, BDO India LLP. “This will not help big developers much who are starved of cash.”